Today’s REI Classroom Lesson

Blake Yarborough talks to us today about how to determine if a property is better as a rental property or a fix and flip.

REI Classroom Summary

There are numerous factors involved when determining if a property is right as a rental. From square footage and the number of beds and baths to the price point, you have to make sure it makes sense to keep as a rental.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Blake: Hello I’m Blake Yarborough, today’s host for the REI Classroom. What I wanted to talk about is rental property selection, what makes a better deal for rental and when you should probably flip.
Mike: This REI Classroom real estate lesson is sponsored by theinvestormachine.com, FlipNerd’s private investor coaching program and your blueprint to investing success.
Blake: A lot of people just want to flip everything or rent everything. Sometimes they kind of mess up without kind of thinking about what maybe they should keep and what they shouldn’t keep. For me, one of the basic things that I look at is what size is it. The other night at a networking event of ours somebody was trying to sell a 2,700 square foot house. I advised a buddy of mine who wanted to buy the property that would be a flip. I explained to him that a 3,000 square foot house costs twice as much to rehab as a 1,500 square foot house. Just for instance, the paint may cost you $4,000 versus close to $2,000, and you need carpet, flooring, etc.
The other thing you look at is does it have a pool or is it waterfront or something like that. If so, you’ve kind of got to be aware because you’ll have either different liability or more maintenance issues with that. With the extra liability, what if somebody falls in the pool, gets hurt, drowns God forbid? If it’s waterfront, you have other issues you’re dealing with, with the bulkhead possibly and other things like that. Something like that, I would go ahead and look at doing a flip on those.
Next, and maybe this should’ve been up there near square footage, number of bedrooms. Most people, a cookie cutter deal is a 3 bedroom – 3/2/2. People, I’ve made a lot of money with four bedrooms, and I’ve also made good money with two bedrooms. Heck, some of my two bedrooms I’ve had people go in there and stay actually longer amounts of time. But, I’m going to tell you in the long term you want to appeal to the masses. People are looking for a three bedroom. Four bedrooms you can sometimes get maybe $100 more a month, but 3/2/2 is your standard bread and butter deal. When you start getting outside of that, you may lose some of the appeal.
Keep price points in mind. Lower value properties may have a better price versus rent ratio. By that I mean you could buy something for $50,000 that maybe you could rent for $900. Yeah, that’s pretty good cash flow for that amount. But, that same property might not have a lot of appreciation over let’s say a five-year period. It might be $60,000 or $70,000. Well, that’s a pretty good amount for a $50,000 house.
But, if you buy something, let’s say a $130,000 house, in five years maybe it’s worth $160,000 to $170,000. It’ll have maybe a bigger appreciation play. It may not have the same cash on cash returns as the lower income property but it should have a good solid cash flow, as well as some good appreciation. That middle point for me in my area is what I think would be about the $120,000 to $160,000 range. Still get good cash flow off of them but there’s still good appreciation.
The next thing, when they’re over about $180,000, it’s kind of hard for me to rationalize to keep these as a rental. A lot of people do. To me, they’re more of an appreciation play because you’re not going to get cash flow quite as much. Now, I have had conversations with other very successful real estate investors. I’ve heard people say your real estate investing portfolio should look like your stock portfolio. I was like, “Hmm.”
Well, what they mean by that is you have your heavy income producing properties. Those are your lower income ones. Then, you have the bulk of them in your 3/2/2 range. Then, you’ll have some properties that might be in highly appreciating areas. It depends what you want. In the lower end it may be more management intensive.
These are all choices you may run into while you’re looking at properties. I just wanted to touch on a couple of little key points where you could quickly analyze on to rent it or to flip it. Once again, this was Blake Yarborough with the REI Classroom. I’m your host. Check us out online at Capital Concepts at 4SmartMoney.com or our phone number (713) 651-9500. Thanks for having me. Bye.
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Blake A. Yarborough is a Houston native who Graduated in 1995 with a MBA from University of St. Thomas with concentrations in Finance & Marketing. He is the President of Capital Concepts, Inc., a company that he started in 1998. Blake became a Real Estate Professional in 1996, and currently has over 150 doors, including both single family and multi-family. He is married to his lovely wife Crystal and has 2 children.